Raynor: What Makes Merck an Exceptional Company

A director at Deloitte Services LP and co-author of The Three Rules: How Exceptional Companies Think, Michael Raynor joins The Fool to share his findings about what makes a company successful for the long haul.

In this video segment we take a look at pharmaceutical giant Merck (NYSE: MRK) , and how "better before cheaper" and "revenue before cost" have placed them at the forefront of a competitive industry. The full version of the interview can be seen here.

A full transcript follows the video.

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Brendan Byrnes: Let's talk about the pharmaceutical industry. You mentioned Merck as one of the top companies there. What is Merck doing better than a Pfizer or a Johnson & Johnson, one of those companies?

Michael Raynor: Well, again, we're looking at 45 years of data with a company like Merck. The company that we compared it to directly was Eli Lilly, another company for which we have a full 45 years of data.

Curiously, there, what we found is that they both have very strong non-price positions. They both are rooted in great science. They make highly effective, highly differentiated therapies for diseases that afflict a lot of people, and they create a lot of value as a consequence.

That's not what differentiated them. What differentiated them was Rule 2, which was Revenue Before Cost; the way in which they were able to drive superior profitability.

Merck was able to both globalize its customer base, and also introduce a much broader array of products more rapidly than Eli Lilly was, and as a consequence drove much of its superior profitability as a result of asset turns born of superior volume, but -- and this is the kicker -- superior volume born of its differentiation.

Econ 101 will tell you, if you want to increase volume you've got to cut price. That's not what they did. They're "better before cheaper." They drove their volume through differentiation, and that's what led to their superior profitability.

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